Articles published in 2013

In future, there may be people who – despite being fit to work – have no economic value

On August 29 1997, Skynet – a computer system controlling the US nuclear arsenal – became self-aware. Panicking operators tried to deactivate it. Skynet, perceiving the threat, launched its arsenal, killed most of humanity, and ushered in a world in which the robots ruled. So went the backstory of the 1984 movie The Terminator . But computers did not become self-aware in 1997 – the closest they managed was when Deep Blue, a B-list supercomputer, beat Garry Kasparov, the world chess champion. Despite decades of hand-wringing about robots taking over, the robots never quite seem to rise.

But perhaps 2014 will be different. Google certainly seems to think so: early in December it purchased Boston Dynamics, a producer of military prototype robots – with names such as “BigDog”, “WildCat” or “Petman” – that wouldn’t look out of place in the Terminator films. These nightmarish machines will now be brought to you by the folks who host all your email, know what your internet searches are and are tracking your phone’s location.

But while the Skynet-esque combination of Google and Boston Dynamics is unsettling, it is not in itself a reason to expect that robot technologies really will change the world. Yet the talk in the economics profession is increasingly taking that possibility seriously.

The primary cause has been with us a long time: the familiar Moore’s law, which in various guises describes growth in computing power as swift and exponential. We have got used to swift growth, but we can never quite get used to the implications of exponential growth – meaning that whatever has just happened will be eclipsed by whatever is just about to happen.

Moore’s law, loosely applied, is that computers today are twice as powerful as the computers of two years ago, perhaps just 18 months ago. Today’s mobile phone is a match for what was once a cutting-edge gaming console; that gaming console, in turn, outperforms the kind of old-timey supercomputer that the Terminator franchise once imagined taking over the world.

Software is also becoming more efficient. We tend to miss this because the bloated copies of Microsoft Word we use do not seem faster than 20 years ago. But a mobile phone running Pocket Fritz 4, a chess program, can now beat grandmasters, despite the phone running far more slowly than Deep Blue did. A chess-playing phone is not about to lead a robot uprising, so why should we care? A growing number of economists – including Massachusetts Institute of Technology’s Erik Brynjolfsson and Andrew McAfee in a new book The Second Machine Age – argue that robots and algorithms are poised to make inroads into labour markets.

Computing power is starting to solve everyday problems – which turn out to be the hardest ones. Computers were laughable drivers in 2004, when a computer-driving competition was “won” by a car that crashed after completing seven miles of a 150-mile course. Now computers drive cars safely.

In 2008, robots still struggled with a problem known as “Slam” – simultaneous localisation and mapping, the process of mentally building up a map of a new location, including hazards, as you move through it. In 2011, Slam was convincingly addressed by computer scientists using Microsoft’s “Kinect” gaming hub, an array of sensors and processors that until recently would have been impossibly costly but is suddenly compact and cheap.

Problems such as language recognition and Slam have so far prevented robots working alongside humans; or on tasks that are not precisely defined, such as taping up parcels of different sizes or cleaning a kitchen. Perhaps the robots really are now on the rise.

Consider “Baxter”. Traditional industrial robots are major capital investments: vast machines kept apart from human workers for safety reasons. Baxter, by contrast, claims to be able to do much of the same work, is cheaper, safely works with humans, and is – its manufacturers claim – intuitive to reprogramme. And if Baxter fails to live up to the hype, Moore’s law means that the robot’s successors – with a computer eight to 10 times more powerful for the price in five years’ time – will not.

What is sobering is that we have already seen convincing evidence of the impact of technology on the job market. Alan Manning of the London School of Economics coined the term “job polarisation” a decade ago, when he discovered that employment in the UK had been rising for people at the top and the bottom of the income scale. There was more demand for lawyers and burger flippers. It was middle-skill jobs that were disappearing. The same trend is true in the US, and is having the predictable effect on wages: strong gains at the top, some gains at the bottom, stagnation in the middle.

The leading explanation is that technological change has favoured certain skills and displaced others. Typists, clerks, travel agents and bank tellers find their skills less valued. Mechanisation now dominates agriculture, large-scale construction and manufacturing. We tend to imagine that manufacturing jobs have disappeared to China; in fact, manufacturing employment in China has been falling. Even the Chinese must fear the robots.

Of course cheap, ubiquitous computing power has brought many good things – and will bring more. The question is whether we are equipped to deal with the possibility that in future, there will be people who – despite being willing and fit to work – have no economic value as employees. By the time today’s 10- year-olds have their degrees, computers could be a hundred times cheaper and smarter than they are today. A future full of robot servants could be a bright future indeed, but only if we can adapt our institutions quickly enough.

‘Your family won’t get you a job or pay your bills … By contrast, distant contacts are sometimes surprisingly useful’

This may be a statement of the obvious at Christmas, but our families can sometimes let us down. Evidence comes from a little-noticed survey published by the US Census Bureau in September. The findings are conveyed in a sad and simple graph. It reports a survey of “households experiencing hardship” in 2011 – and who helped them when times were tough. What counted as tough times? Having a phone disconnected, missing utility bill payments, falling into rent or mortgage arrears, or not seeing a doctor or dentist when needed.

More than half of such households expected help from family members, as did almost half from friends. Rather fewer – about a fifth – hoped for help from a social agency, charity or church.

The overwhelming majority were disappointed. It was rare for family members to provide help with rent arrears – about one time in six – and it was rarer still to receive financial help from other sources or for other purposes.

In short, hard-up Americans were confident of help in need from those close to them – and that confidence was misplaced. (If you’re looking for an explanation of the popularity of payday loans, this finding isn’t a bad start.)

An optimistic reading of this research is that there are plenty of people whose families or friends did help them and thus never featured in the sample. Perhaps. But as the economist Timothy Taylor comments, enough people experience disappointment to leave “lasting shadows”.

This dispiriting stuff reminded me of Mark Granovetter’s work on “the strength of weak ties”, published in 1973. Granovetter, a sociologist, brought together two disparate strands of work: a survey of how people with professional or managerial jobs had found those jobs; and a theoretical analysis of the structure of social networks.

Start with the theoretical observation first: the most irreplaceable social connections, paradoxically, are often rather weak or distant ones. A family group or clique of close friends all tend to know each other and know similar things at similar times. Their social ties are strong but also redundant, in the sense that there are many different paths through which information could pass from one member of that group to another.

By contrast, “weak ties” between one social cluster and another are valuable precisely because the social contact is unusual. Information passed along a weak tie will often be totally new – and if it doesn’t arrive through the weak tie, it is unlikely to arrive at all.

Granovetter then supplemented this theoretical idea with his survey, showing that it was very common for people to find jobs – especially managerial jobs and jobs with which they were satisfied – through personal contacts. The old saw is true: it’s not what you know, it’s who you know. Or as Granovetter put it in his book Finding a Job, what matters most is “one’s position in a social network”.

But this is not because of crude nepotism: the key contacts who helped jobseekers find jobs were typically distant rather than close friends – old college contacts, perhaps, or former colleagues. Granovetter’s analysis made this finding make sense: it’s the more peripheral contacts who tell you things you don’t already know.

More recent research – for instance, a “big data” analysis of millions of mobile phone records conducted by Jukka-Pekka Onnela, Albert-László Barabási and others – has backed up Granovetter’s argument that the weaker ties are the vital ones.

It’s a disappointing message to deliver at Christmas: your family won’t get you a job or pay your bills – count yourself lucky if they serve you a slice of turkey. By contrast, distant contacts are sometimes surprisingly useful: no wonder we send Christmas cards to people we barely remember.

(noun) A unit of the first and most famous cryptocurrency. After “bit”, a contraction of “binary digit”, the basic unit of digital information.
It all sounds very mysterious. The Bitcoin is a currency based on cryptographic principles; it was created by a pseudonymous programmer, or programmers, called Satoshi Nakamoto. New Bitcoins are “mined” and the entire system is maintained by a decentralised peer-to-peer database recording every transaction in the history of the currency.
Bitcoin promises to be a new type of money. Economists like to say money has three properties: it is a medium of exchange, obviating the need for barter; a store of purchasing power; and a stable unit of account that serves as a standard of what is expensive.
As a peer-to-peer processing network, Bitcoin has the potential to become a superb medium of exchange. Our current systems for digital payment require intermediaries such as MasterCard or PayPal, and fees can be higher than consumers realise. The Bitcoin network allows Andy to send money to Belinda and have the transaction verified “in the cloud”, so to speak, at no cost.
As a stable unit of account, however, Bitcoin is a failure. The currency’s volatility would make a dotcom director blush. That need not matter: a price can be listed in dollars, then transacted using the Bitcoin system. The dollar’s superb record as a standard of value can be married with the Bitcoin network’s ability to process payments cheaply. Alas, Bitcoin is currently used for speculation not transactions. Everyone wants to own Bitcoins but few spend them.
Bitcoin appeals to speculators for its frothy price and to libertarians for what it seems to stand against: it is not controlled by large corporations; it is not issued by a central bank; it is not really fiat money at all, even though the commodity that backs Bitcoin is a mathematical abstraction. Perhaps one day Bitcoin will gain momentum not because of the ideals it embodies, but because it turns out to be useful.

Inheritance is a demeaning way for a 50-year-old finally to establish a pension, writes Tim Harford

‘Securing a juicy inheritance may prove the best bet for the generation that came of age under Margaret Thatcher, with their prospects for decent retirement incomes looking increasingly bleak.’ – Financial Times, December 17

Is that news? I thought we knew that our pensions were worth nothing.

Some pensions are worth plenty – including those for many people now on the brink of retirement. This story was based on a report from the Institute for Fiscal Studies, examining the broader question of how today’s 40-year-olds are doing compared with 40-year-olds 10, 20 and 30 years ago.

In other words, are we richer than our parents?

To be precise, are we richer than our parents were when they were our age, judging by income, savings, debt, pensions and housing.

And the baby boomers took all the money?

The boomer generation did roll like a gigantic steamroller through the past 60 years and did pretty well. Take real equivalised household income.

Take what?

A measure of income corrected to take account both of inflation and different family sizes. What the IFS finds is that the generation born in the 1940s – currently about 70 – was richer at the age of 60 than the 1950s generation is today, now aged about 60. And the 1950s generation was richer at the age of 50 than the 1960s generation is today, just as the 1960s generation was richer at the age of 40 than the 1970s generation is today.

So we’re all getting poorer. But the economy hasn’t been shrinking for 40 years, has it?

No. It shrank a lot five years ago and has hardly recovered. That is largely why each generation now is doing badly relative to the previous cohort 10 years ago. But there’s more to the story than the recession. What we see is that the 1970s generation had more money when they were young than their parents did. But they spent it.

They really only have themselves to blame, then.

Well – perhaps, perhaps not. Nobody knew quite how generous – or expensive – today’s pensions were going to be. Even if the younger generation were far-sighted it’s not clear they would want to pay for quite such gold-plated retirements. But anyway, they were short-sighted, as we all are, and will pay the price. Their parents may have been equally myopic but typically had automatic pensions and didn’t have the same freedom to mess up.

So today’s thirty and fortysomethings have been screwed on pensions.

Well, yes, they have. But they’ve also hurt themselves. At the age of 30, the 1970s generation was spending almost twice as much as the 1940s generation and, unlike all previous cohorts, they were net borrowers rather than net savers.

What about house prices?

That’s another part of the story, in which everything seems to be conspiring to favour the boomer generation. House prices are near record levels, which of course helps homeowners – who tend to be older. Younger people have struggled not only to buy a home, but also to upgrade the homes they have. According to estimates cited by the IFS, the average age of first-time buyers has risen by five years since the 1960s – but the average age of second-time buyers has risen by an astonishing 15 years. Even people who can get on the housing ladder have only grabbed the bottom rung and are digging their fingernails into the wood.

No wonder the IFS sees salvation in inheritance . . .

But inheritance is unevenly distributed, as well as a slightly demeaning way for a 50-year-old finally to establish a pension pot. This is a social mobility issue: young people can’t get ahead without receiving money from mum and dad.
So what is to be done?

A spot of strong economic growth would do no harm: although this issue has long been brewing, it has been worsened by the recession. Building more houses would help young people to find jobs and buy homes – as well as deflating house prices and thus shrinking those inheritances. A property tax might nudge a few empty-nesters into downsizing their homes. And it is absurd that as austerity is hitting schools, university, services and working-age benefits, the state pension is sacrosanct for current pensioners. The problem is becoming too acute not to be addressed – too late for today’s thirtysomethings, but not too late, perhaps, for their offspring. If they can ever scrape together the cash to afford children.

Citizenship auctions are just the ticket for those who lose in the lottery of life, writes Tim Harford

‘UK ministers are under growing pressure to intervene against plans by the island of Malta to sell EU passports for €650,000, allowing buyers immediate rights of residency in all member states.’ – Financial Times, December 9

That’s outrageous!

I know. There has to be a cheaper deal out there. You can get Portuguese residency with €500,000 in your pocket – and you don’t even have to give the money away. You just have to buy a pad in Portugal.

No, it’s outrageous that Malta is selling passports.

Oh. Well, granted, there is an issue here. Given EU rules on freedom of movement, Malta is in effect selling EU citizenship but pocketing the cash. But this sort of problem is in the nature of the EU. Member states will either have to tolerate it or develop some sort of centralised regulator – just as the European Central Bank regulates the shared currency. That has been a tremendous success.
So in your view the main problem is that the sale of EU passports should be centrally administered?

That would be more logical. Since EU passports are close substitutes for each other, we can’t allow member states to pocket the gains of selling passports but impose the costs on each other.

And what are the costs?

Well, if you’re selling passports at €650,000 a pop, the costs have got to be very close to zero. Not many people will be able to afford that – a few hundred applications are reported to be in process – and those that can are unlikely to be a drain on the state. If the price was 50p and a pound of grapes, there would be a very large number of takers and one might reasonably start to ask whether Malta should really be selling the right to move to Paris.

But isn’t there a security risk?

I am not convinced al-Qaeda has been held at bay by an inability to pick up a Maltese passport for €650,000. As for some Russian mobster buying the right to live in Berlin – that is more distasteful than dangerous.
Distastefulness is important, though. Aren’t we cheapening citizenship?

I hardly think that €650,000 cheapens the EU passport. For the typical British citizen, the message Malta is sending is that the passport in your pocket is worth more than your house and your pension pot put together. Which may not be far wrong: take a typical UK citizen, dump her in Calcutta or Dar es Salaam and see how she gets on. EU citizenship is more valuable than most EU citizens realise.

‘Cheapens’ was the wrong word, perhaps. I should have said ‘commoditises’. Don’t you think there are some things that money shouldn’t be able to buy?

I do indeed – but that leaves open the question of whether citizenship is one of them. Malta’s undisguised flogging of EU passports is viewed with outrage, while “investor” programmes elsewhere – including the UK and the US – attract less opprobrium. That suggests we’re willing to exchange citizenship for cash provided the transaction is disguised as something else. This is hypocrisy.

You’d be happy to sell EU citizenship, then?

I would. I’m with Gary Becker, an economist and Nobel memorial prize winner, who has argued for as long as I can remember for the US to auction off the much-in-demand right to be a citizen. The idea has various frills – including rent-to-buy deals and a sort of student-loan system to allow poor immigrants to buy citizenship on the never-never – but is basically sound. Citizenship is being given away in arbitrary and bureaucratic ways, leaving most would-be immigrants disappointed and many existing citizens resentful. An auction system would streamline the process, be more likely to give citizenship to those best able to take advantage, and would raise cash and thus reduce anti-immigrant sentiment.

This is close to sacrilege, if you ask me.

That’s a strong word to use in defence of our global border control system. We wring our hands about inequality, but the biggest determinant of your income is your country of birth. Our closed borders entrench that unfairness. The system can be defended on pragmatic grounds, but if you’re going to suggest it’s sacred, I’m happy to be profane.

What next, then? Will Goldman Sachs or Google buy some Caribbean island and start selling corporate citizenship? How much for an Amazon Prime residency? Will we get silver, gold and platinum passports?

Portugal is way ahead of them; their “golden residence” programme was launched last year.

‘Are we doomed to live in a commercial society distorted by a concept which leaves out so much that really matters?’

Call it the Christmas paradox. Our seasonal festival is the occasion both for a colossal consumerist blowout and for reflecting on the importance of things money can’t buy: family bonds, friendship, anticipation and nostalgia.

So as the mince pies bake and the sherry flows, whither GDP? GDP – or gross domestic product – measures the size of the economy by adding up all income earned, or all money spent, or the monetary value of everything produced: the three should be equivalent. But they are not, notoriously, equivalent to some deeper measure of what all this stuff is really worth to us.

As the economist Diane Coyle points out in her forthcoming book GDP: A Brief But Affectionate History, the idea that GDP would measure wellbeing was sidelined in the 1930s. Simon Kuznets produced the first serious estimates of US GDP in 1934, and wanted to adjust his calculations to reflect “the elements which, from the standpoint of a more enlightened social philosophy than that of an acquisitive society represent disservice rather than service”. It was a political battle that Kuznets lost: America was focused on ramping up production to escape the Depression and prepare for war.

Why not, then, replace GDP with a measure of what really matters: happiness? This suggestion just won’t go away, despite the fact that happiness is already widely measured. And while the measures of it look useful and are inexpensive to collect, they’re surely too crude for macroeconomic purposes. Imagine calculating national income the same way we do happiness, by asking everyone, “How much money do you make, on a scale of one to seven?” and then averaging the result. I’m not sure we’d learn a great deal.

Yet GDP is problematic, and increasingly so. We seem to have no convincing measure, for example, of what contribution financial services make to the economy. In the wake of the recession, Andrew Haldane of the Bank of England pointed out that according to the UK’s national accounts, this contribution grew at the fastest rate on record in the fourth quarter of 2008 – the quarter that began a fortnight after Lehman Brothers collapsed.

Or consider what appears to be an opposite error. According to the economist Erik Brynjolfsson of MIT, the information sector of the economy (software, telecoms, publishing, data processing, movies, TV) has scarcely grown over the past 25 years as measured by GDP. This seems bizarre but it’s easy to see the logic: GDP measures the price paid for goods and services, but many valuable digital services are free or cheap. Brynjolfsson and co-author JooHee Oh reckon that every year consumers in the US are enjoying an extra $100bn of services online they don’t have to pay for.

There are plenty of other knotty problems too – from how to measure the losses caused by distracting Facebook posts to how to calculate the gains from antibiotics and super-efficient lighting.

Coyle argues that GDP collection needs to be reformed but not replaced. I agree. But where does that leave Christmas? Are we doomed to live in an increasingly commercial society that’s distorted by a concept which leaves out so much of what really matters?

Perhaps crass commercialism is our fate. But let’s not blame GDP (or its close cousin GNP, gross national product) for that. In 1968, Bobby Kennedy famously declared that GNP “counts napalm and … nuclear warheads and armoured cars for the police to fight the riots in our cities. Yet [it] does not allow for the health of our children … the beauty of our poetry or the strength of our marriages”.

Indeed, it does not. But divorces don’t begin at the Office for National Statistics; nor did the Bureau of Labor Statistics start the Vietnam war. GDP has its flaws – but if you give, or receive, a costly, unwanted gift this Christmas, please don’t blame the statisticians.

Dear Economist,
Christmas cards are starting to drop through the letterbox and many contain infuriating round-robin newsletters from people I barely know. This is no substitute for real friendship. Why do people send junk mail instead of a proper letter?
Tom, Lancaster

===
Dear Tom,
You say that people send newsletters “instead of” a proper letter, but I wonder if this is true. Newsletters are subject to extreme economies of scale: the first copy is time-consuming to produce but the rest take just seconds. The likely result is that many people receive newsletters who might otherwise get nothing at all, or only a card reading “best wishes, Brian”, leaving you to wonder who on earth Brian might be.
That is no consolation if it is really preferable to receive nothing at all than to receive a newsletter. But that seems unlikely: economists talk of “free disposal”, a theoretically convenient assumption that would not apply to a half tonne of manure on the doorstep, but surely describes the marginal cost of throwing away Brian’s newsletter along with his card. If you are so certain that these newsletters contain nothing of interest, waste no time in reading them.
You have evidently not discovered the work of economists Jess Gaspar and Ed Glaeser, who show that the new communication technologies – mobile phones, e-mail, word-processors – are not substitutes for traditional human interaction but complements to it. These newsletters, like e-mails and weblogs, help keep friendships alive and actually increase the number of old-style face-to-face meetings.
If you are finding that despite all these newsletters you still have no real friends, I don’t think you should blame the newsletters.

Dear Economist,
The Christmas decorations seem to go up earlier and earlier every year. It infuriates me, but do you think this is efficient?
Yours sincerely,
Toby Kerrell, Birmingham
…………………………..
Dear Toby,
I’m a bit of a traditionalist myself: I think decorations should go up a few days before Christmas (some say on the last Sunday of Advent, others say on Christmas Eve) and then stay up for the full 12 days.
To me, this means that Christmas starts with a bang and then lingers briefly but pleasantly, rather than being a long slog to an inevitable anticlimax, whereupon the tree is thrown out on Boxing Day.
If Christmas was a private affair, more like a birthday, that would be easy to arrange. The party balloons would be blown up exactly when I wanted them. I have not subjected my hypothesis to an econometric test, but casual empiricism suggests that when people do put up birthday decorations, they tend to linger for a few days at most and, importantly, go up on the day itself, not in advance. I suspect that this is the efficient strategy for putting up party paraphernalia.
Alas, because it is a collective celebration, Christmas is one big market failure. The worst culprits are the shops, who obviously wish to generate a festive mood before Christmas Day, not afterwards, so that they can sell things.
Consumer power is all very well, but the garish displays affect passers-by as well as customers. Whatever collective disgust we have for the sound of Bing Crosby in October, it is clearly not enough to dissuade them.

‘The idea that hard work needs to be rewarded is a farmer’s view. The claim that “we’re all in this together” is hunter-thinking’

In the early 1980s, the anthropologist Hilly Kaplan visited Paraguay to study a hunter-gatherer tribe called the Aché. He found a moral code that, by western standards, seemed too good to be true: Aché hunters shared with open hands, giving away 90 per cent of their meat and 80 per cent of the grubs and fruit they gathered. The Aché believed that a hunter who ate his own kill would be cursed.

As the years passed, Kaplan saw this sharing culture disappear. The rainforest was being hacked back, so the Aché found that foraging would no longer sustain them. They put down roots – literally – and began to farm. And as they started farming, they stopped sharing.

This sad story makes perfect sense. Hunters have enormously volatile incomes: one day they may catch more than they can possibly eat; the next day, nothing. Kaplan discovered that Aché hunters came home empty-handed slightly more often than not. At such a strike rate a hunter would expect to do without food for an entire week about once every year.

Even a skilled hunter is largely at the mercy of good or bad luck – but others in the tribe may have better luck on the same day. It’s easy to see why a strong tradition of sharing might have arisen.

Farmers, by contrast, are less exposed to individual luck. Bad weather will probably affect neighbouring farms too, so there’s less to be gained from pooling risks. And there’s much to be lost: insurers invented the term “moral hazard” to describe cases where people are lazy or careless because they know they’re insured. Sharing encourages scroungers.

So maybe views of fairness are shaped by the environment in which we find ourselves. Hunters value sharing; farmers value self-sufficiency through hard work. Both are admirable virtues and both are appropriate to the situation.

Kaplan teamed up with other researchers, including Vernon L Smith, a winner of the Nobel memorial prize for economics, to test this idea. They concluded that sharing accompanies “unsynchronized variance in resource availability” – researcher-speak for “You never know who’ll be next to bag a monkey.”

Megan McArdle, in her fascinating forthcoming book The Up Side of Down, observes that modern societies can’t make up their minds whether to adopt the morality of farmers or of hunters. The idea that hard work needs to be rewarded is a farmer’s view of fairness. The claim that “we’re all in this together” is hunter-thinking.

Mostly, we seem to think like farmers. The government does tax and redistribute but spending on roads, police or the army isn’t redistribution. The National Health Service is probably the most prominent, beloved and well-funded expression of hunter morality we have – after all, anyone can fall sick without warning. But an Aché-style tax rate of 80 or 90 per cent for all seems unimaginable.

Economic success in the modern world requires tenacity and talent. It also requires luck. Perhaps it’s not surprising, then, that our moral intuitions straddle the fence between farmer and hunter.

But there’s something different about 21st-century luck – it tends to last far longer than a day. Accidents of parentage are important. So is timing: people who graduate during a recession experience years of depressed earnings after missing the perfect window to step on to the career ladder. Experimenters have sent thousands of CVs to prospective employers and shown that “farmer virtues” – a high-quality degree or relevant business experience – seem less important than your skin colour or the length of time you’ve been unemployed.

The importance of luck in the modern economy might push us towards the fair-shares-for-all morality of the hunter. But if the lucky know they can stay lucky for a lifetime, why share at all?